An Industry That Dares Not Meet in the Country of Its Best Customers

By MATT RICHTEL

Published: May 17, 2004

Toronto's tourism Web site promises warm spring weather and hundreds of great restaurants. But for a group of Internet gambling executives gathering today in Toronto, the absence of American law enforcement authorities may also be a big draw.

Operators of overseas online casinos - an industry with millions of American customers- are under threat of prosecution because much of what they do is illegal in the United States. According to legal experts and the organizers of the conference, called the Global Interactive Gaming Summit and Expo, the operators could face arrest if they entered the United States.

"They're exiles," I. Nelson Rose, a professor at Whittier Law School in California, said of Americans who have moved overseas to run Internet gambling sites. Although there may not be warrants for their arrest, Mr. Rose said, "they can't be sure." The Justice Department did not respond to questions about the legal status of operators of overseas online casinos.

That the conference is being held outside the United States - even though nearly half of all online bets are placed by people in the United States - shows the legal tangle the industry faces.

The federal government contends that under the Wire Wager Act it is illegal to offer sports wagering over the Internet. And the Interactive Gaming Council, a trade association for online casinos, has in the last several months asked five online sports betting sites to resign their memberships.

Legal experts said that while it is not clear whether federal law forbids forms of gambling other than sports betting, many states make all online gambling illegal.

Keith Furlong, deputy director of the council, said lawmakers might be more flexible on the issue of legalizing online casino gambling than sports betting, given the federal law.

"This was a political decision dictated by the U.S. market," Mr. Furlong said of the move to drop sports sites from the organization. He added that the council's members felt "they would have more success advocating for" licensing of casino gambling without being hampered by the question of sports wagering.

Online casinos are legal in some countries, among them Britain and Costa Rica, where many sports betting operations are based. Indeed, the World Trade Organization ruled in March that the United States was in violation of its free trade obligations by prohibiting Internet gambling.

Still, United States law enforcement officials have tried to slow the growth of online gambling. Last year the Justice Department began a grand jury investigation of American companies that provide advertising and other services to offshore online casinos. Many broadcasters and several major Web sites like Yahoo and Google have since decided to stop running advertising for online casinos.

The conference organizers said they would discuss the growing number of roadblocks to their business. One of the biggest challenges, they said, is how to develop online payment mechanisms that make it easier for gamblers to place bets. Many American banks no longer allow credit cards they issue to be used for Internet bets because it is not clear that wagering debts would be enforceable, legal experts said.

Still, some participants are confident that the industry can overcome the legal and banking obstacles.

"I am very, very, very keen on hearing views on how we might swing towards regulation and recognition in North America," said David Carruthers, the chief executive of BetOnSports.com, a site that took some 33 million bets last year, 97 percent of them from the United States. Mr. Carruthers said he wanted to begin forging alliances to improve the industry's lobbying efforts in the United States.

Mr. Carruthers, who is British, said he traveled frequently to the United States and was not worried about being arrested. In fact, he is scheduled to speak to a gathering of the National Council of Legislators from Gaming States in New Mexico in June.

Mr. Rose of Whittier Law School said the people at risk for prosecution are American citizens who operate online sports casinos overseas and then return to the United States. He noted that the United States and China recently signed a treaty that could allow Americans who break gambling laws to be extradited from China.

There have been a few prosecutions of American operators of overseas casinos. In 1998, Jay Cohen, an American citizen who set up an online sports betting operation in Antigua, was charged with violating the Wire Wager Act. In 2000, after he returned to the United States to fight the charge, he was convicted in federal court and sentenced to 21 months in prison.